Plan for retirement early in life

With an increasing lifespan and disintegration of joint families, saving for the retirement years has become a necessity. Depending on your risk tolerance and investment horizon, you have to determine your asset allocation strategy. If you start planning for your retirement early in life, you have a longer investment timeframe and higher risk tolerance level. Hence, your portfolio will be heavily titled towards equity. Those who procrastinate till the later years will have to invest in low-risk debt instruments such as fixed deposits.

Consider a person with a very low appetite for risk. By simply investing in the Public Provident Fund (PPF), he can build a healthy retirement corpus. Interest rates on the PPF have been revised upwards recently from eight to 8.6 percent. The ceiling on annual contributions to the fund is Rs 1 lakh now from Rs 70,000 earlier.

If you set aside Rs 1 lakh per year in a PPF account, in a period of 30 years, your investment would have grown to the tune of Rs 1.30 crores approximately. This is the power of compounding and benefit of starting early.

If you have a higher threshold for risk, you can invest in equity, precious metals and such avenues, besides maintaining some exposure to debt products such as a fixed deposit.

A general thumb rule states that a person can withdraw roughly four percent from his retirement corpus that includes inflows in the form of interest and dividends. This quantum of withdrawal is estimated to support a person , even 25 years after retirement.

Ganesh has saved Rs 1 crore towards his retirement fund. He can withdraw from his Rs 1 crore retirement savings an initial amount of Rs 4 lakhs (four percent). However, one has to factor in the impact of inflation on the purchasing power of an individual.

Suppose the inflation rate were nine percent, he would have to withdraw Rs 4.36 lakhs from his retirement fund to retain the same spending power The next year, factoring in inflation, his withdrawal must be Rs 4.72 lakhs and so on. By increasing the inflows, Ganesh can maintain the same level of purchasing power round the year despite inflationary pressures.

Rebalancing your portfolio so that the asset allocation is on target is critical. Rebalancing of a retirement portfolio must be done at least once a year. An investor has the choice to pump in more money into an under-weighted holding or sell some holdings to rebalance the asset allocation. A well-invested and balanced portfolio will meet all your retirement needs.